How Administration Tax Package
Affects “Tax Loss Farming”
The Nixon Administration tax
reform package indirectly limits
some ‘tax loss farming” abuses.
Tnere are important differences
in objectives and lines of attack
between the Administration pro
posal and the Metcalf-Culvcr tax
Need . . .
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loss farming bill. The Metcalf-
Culver bill attacks the pioblcms
of non-farm interests in agricul
ture head-on It limits or elimin
ates writing off farm losses over
$15,000 against non-farm income
(if non-farm income Is $30,000
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or over, no farm losses would be
deductible). Eliminating the tax
incentive is merely the device
for accomplishing the objective.
The Administration proposal
comes at the problem from the
other end—seeking to limit var
ious ways people evade or un
fairly reduce their taxes Tax
loss farming happens to be one
abuse.
The Metcalf-Culver bill deals
quite effectively with the en
croachment of non-farm interests
into agriculture. In the process,
it closes an important tax loop
hole and brings a good deal of
money into the Treasury (an es
timated $145 million a year). The
Administration proposal deals
less effectively with the entry of
non farmers into agriculture.
Neither does it close the tax loss
farming loophole quite as firmly,
nor does it promise to bring as
much money into the Treasury
(an estimated $lO million the
fiist year and $5O million a year
by 1975).
The major Administration de-
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vice for closing the tax loss farm
ing loophole is to limit capital
gains after faim losses have been
excessive (above $5,000 a year).
Thus, the conversion of ordinary
income into capital gains by sus
taining heavy losses year after
year which arc written off against
ci dinary income, would be sharp
ly limited It gets at the pioblem
in an indirect and complicated
way. Here’s how it would work
When farm losses are ovei
$5,000, a figure representing the
excess would go into what is
called an Excess Deductions Ac
count (EDA). Fuluie farm in
come would reduce the EDA and
would be taxed as oidmaiy m
come as long as anything is left
in the EDA No capital gains
would be allowed until the EDA
is wiped out.
For example, a corporate ex
ecutive owns a faim and in 1969
ordinary deductions exceed or
dinary income by $20,000 He can
write off this loss against his
other income, however, $15,000
goes into his EDA. In 1970, his
ordinary farm income equals
farm expenses, but he sells
breeding stock for $20,000 Pre
sently, if he had held this stock
for more than a year, the $20,-
000 would be taxable as capital
gains. But under the new pro
posal, he would be requited to
pay ordinary income tax on $15.-
000 (the amount in the KDA),
and would be eligible for the
capital gains i ate only on $5,000.
This same rule would apph to
land, but only up to the actual
amount spent on such impi ove
rrent on soil and water conserva
tion, or the amount in his EDA.
v hichcver is lessci Another pait
of the Admimstialion pioposal
pi ov ides for lecapluie of exces
sive depieciation on livestock,
the same as now applies to faim
machinery The period livestock
must be held for capital gains
would be extended to two yeais
(fiom the present one year).
This would cut down some of the
“play” by Wall Stieet faimeis
b> making it less attiactive for
them to get in and get out so
quickly In addition, the Admin
istration pioposal would allow
losses of $50,000 moie than gross
income for only three out of
five years, instead of the present
five consecutive years
Another pait of the Adminis
tration reform package would
cut down some of the gioss
abuses by a Limit on Tax Pref
erences (LTP). One such “tax
preference” is capital expendi
tures on farms such as soil con
servation, terracing, drainage,
etc But this limit would only
apply when the total of such
preferences, such as oil deple
tion, depreciation of property
gnen to charity, and farm pref
erences total more than the indi
vidual’s ordinary income It
would probably take a combina
tion of such preferences to be
affected.
If agricultural chemicals
were not used for insect control,
crop and livestock production
would decrease by 25 to 30 per
cent m a few years. With such
losses, most food items would
be in short supply and prices of
food would rise greatly.
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Allen G. Musser
Bowmansville, Pa.
Phone: 445-4161 or 445-6721
25